Comparison of Problem Bank Identification, Intervention and Resolution in The SEACEN Countries
AbstractEffective problem bank identification and resolution is crucial to ensure not only the soundness of a bank but also for the resilience of the financial system as a whole since banks are dominant players in the financial system. Successful problem bank management will reduce the potential of both individual bank failures and banking crisis as well as minimise resolution costs. Hence, a comprehensive, clear framework and guidelines for dealing with problem banks is crucial. This study aims at two main objectives: (i) to analyse the framework and process of problem bank identification, intervention and resolution in the SEACEN countries; and (ii) to identify key issues and lessons learned for an effective problem bank management. In general, bank supervisors in nine SEACEN surveyed countries have a clear legal and prudential framework in dealing with problem banks. However, the level of progress diverges from country to country depending on their legal and political settings as well as economic development. Crisis hit countries (Indonesia, Malaysia and Thailand), and countries experiencing banking system distresses (Philippines and Republic of China, Taiwan) appear to have a more developed framework, particularly on crisis management. Supervisory authorities in the crisis countries have enhanced the effectiveness of their banking supervision along with the post-crisis bank restructuring program. However, non crisis hit countries (Cambodia, Nepal, Papua New Guinea and Sri Lanka) have a less comprehensive framework. Non-crisis countries mostly are yet to have an explicit deposit insurance scheme and develop a crisis management framework. Among key challenges for bank supervisors is to ensure both macro and micro supervisory objectives ¨C to maintain financial stability and ensure depositor protection ¨C are effectively attained. In practice, it often is difficult to identify and measure as well as manage systemic risk which requires different skills and methodologies. Therefore, it is imperative to perform ¨C and enhance the efficacy of ¨C macro-prudential surveillance to identify, monitor and mitigate the risks to the financial system. For countries which are yet to have a crisis management framework it is important to develop comprehensive financial safety nets, consisting of: (i) an explicit and limited deposit insurance scheme; (ii) a well-defined and transparent LLR both in normal times and during systemic crises; and (iii) a clear crisis management framework. Deposit insurance and LLR can be important tools for crisis management, but they are not sufficient to prevent banking crises. They should be used along with measures such as market discipline and prudential banking supervision. A well-devised framework is essential, but effective implementation is much more important. It is necessary to perform a crisis simulation regularly in order to increase readiness in managing crisis Therefore, capacity building is indispensable.
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Bibliographic InfoThis book is provided by South East Asian Central Banks (SEACEN) Research and Training Centre in its series Research Studies with number rp73 and published in 2008.
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